Jim Bianco Expects `Retrenchment’ of Stocks

Jim Bianco, president of Bianco Research, talked with Bloomberg’s Susan Li about the outlook for U.S. stocks. When Li asks him about the 3pc gains we saw yesterday, he said the markets were oversold but that he expects stocks to retrench. Notice he talks about gold and Treasuries as asset classes of choice, which I also have mentioned.

While I also said that markets looked oversold on Monday, on a fundamental basis there are a number of headwinds the least of which is the European bank stress tests. Bianco also talks a lot about the stress tests for European banks in addition to his investment strategy and the U.S. housing market.

European Union regulators are conducting the stress tests on 91 banks (see the full list here) from all EU states, accounting for 65 percent of the area’s banking assets. The purported rationale is to examine whether the banks can withstand negative economic shocks or a haircut in government bond values. But like the US tests, this is an mock exercise in confidence building more than anything substantial. the US had the advantage of conducting their tests against a backdrop of a strengthening economy. With the backdrop for growth weaker now, it will be interesting to see the market reaction to the tests when results are released on July 23rd.

Bottom line: the market is rallying from oversold conditions, but the risk trade is over.

Note: I posted a video on "the death cross" from INO MarketClub in the links earlier this week. If you’re interested in technical analysis, this might be something to look at. Pragmatic Capitalism also ran a piece on this same topic.